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The Hard Lesson Japan Can't Master

By Howard Gleckman When economists get really gloomy about the U.S., they fall back on a frightening comparison: America, they say, is becoming another Japan. It's tasty rhetoric. After all, in the 2î years since the U.S. bubble popped, the stock market and interest rates have plummeted, capital investment has slowed, and hints of deflation have appeared on the horizon. But the U.S. as Japan? Come on.

True, the Standard & Poor's 500 index has slumped by a third since its 2000 peak, and that hasn't been pretty. But the Japanese stock market hasn't just fallen, it has collapsed. The Nikkei industrial average of Japanese stocks has been a smoking ruin for 13 years, not three, and over that period, it has lost close to 80% of its value.

In the U.S., we have had a few occasional quarters of falling prices. The overall price level in Japan has been declining for the better part of a decade. No major industrialized nation has suffered a bout of asset deflation like this since the Great Depression.

ZOMBIE DECADE. The real reason why the U.S. is not Japan -- and why the current period of sluggish growth will end sooner rather than later -- is that we fix our financial problems, while the Japanese don't. In the U.S., when a WorldCom, an Enron, or a Global Crossing gets in trouble, it's allowed to die. Shareholders count their losses and move on. Most important, lenders write off the debt, lick their wounds, and get on with business.

In Japan, the banks, the Finance Ministry, and a boatload of troubled companies have allowed financial problems to fester. Outfits with no earnings and no prospects are simply kept alive, zombie-like.

This allows Japanese workers to keep their jobs -- the country's unemployment rate is roughly the same as that of the U.S., despite a 13-year recession. But there's a massive downside: Banks must keep all that garbage debt on their books, as if it will someday be repaid. And because they do, they have no money available to lend to upstart businesses that, in a different environment, might lead Japan out of its economic morass. As a result, no startups -- and no growth -- emerge.

POLITICAL RESCUES. In the U.S., on the other hand, banks get bad loans off their books quickly. As a result, plenty of money is available for new capital investment. True, it takes time for the cash to get into the system -- overly skittish banks always take too long to regain their nerve and begin lending again. But the post-bubble malaise may already be working itself out. Bank loans in the U.S. have been rising smartly since May.

The U.S. economy is by no means out of the woods. Business confidence remains exceedingly fragile -- partly because of the soft stock market and corporate corruption and also because of uncertainties over Iraq and terrorism.

The politically well-connected in the U.S. still can get bailed out: After September 11, the feds gave $5 billion in cash to the airlines and have promised billions more in loans. And earlier this month, President George Bush and Congress handed property and casualty insurers a massive government bailout, effectively leaving taxpayers on the hook for up to $90 billion in potential terrorism-related claims.

Fortunately, such boondoggles are the exception. So far, at least, Washington has avoided the temptation to bail out the troubled telecom sector.

NO PAIN, NO GAIN. In Japan, the bailouts continue. Every year or so, its government signals a change of policy, vowing that this time, for sure, it will make the tough choices, clean up the nation's balance sheets, and move forward. And just as predictably, Tokyo does nothing.

Sure, since the market's bubble burst in 2000, the U.S. has taken it on the chin. Businesses have folded, people have lost their jobs and their retirement nest eggs. It has been pretty rough for many. But the shakeout has been necessary. And at the risk of echoing Treasury Secretary Paul O'Neill, who's been criticized for being overly bullish, the U.S. economy is sound. That's a lot more than can be said about Japan's. Gleckman is a senior correspondent in BusinessWeek's Washington bureau. Follow his views every Tuesday in Washington Watch, only on BusinessWeek Online

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